US wonders how Canada forestalls bank failures

Toronto
— US congressional banking committees are looking again at Canada's cautious but very profitable nationwide banking system as they investigate the latest disasters in American banking.

Whereas no Canadian bank has failed since 1926 and all of them survived the Great Depression intact, the insolvency of the United American Bank (UAB) of Knoxville, Tenn., is not only the fifth-largest bank failure in United States history but the 49th in the last decade.

The major differences between Canadian and American banking are the transcontinental operations of banks in Canada (unlike many US ones, which can do business in only one state) and ownership laws.

Unlike Canada's banks, where more than 10 percent control by any one person or group is prohibited by federal law, the UAB of Knoxville was dominated by majority owner Jake Butcher and his family until it was disclosed that the bank had chalked up $160 million in loan losses.

In fact, UAB of Knoxville was the centerpiece of Mr. Butcher's small banking empire. It included other personally owned banks in Chattanooga (93 percent Butcher-controlled) and Memphis, and at Lexington and Somerset in Kentucky.

The kinds of legal actions against private banks such as those commenced by the Federal Deposit Insurance Corporation (FDIC) and FBI against the UAB of Knoxville are so far unheard of in Canada.

The FDIC moved very fast to merge the insolvent Knoxville bank with its competitor First Tennessee National Corporation. The FBI will investigate whether or not UAB of Knoxville bank executives were guilty of committing criminal acts when they made private loans in excess of $54 million to their relatives when the bank's equity stood at only $42 million.

The collapse of this major Southern bank, with the later announcement that Mr. Butcher will pull out of his other family-owned banks, came within months of the collapse of the Penn Square Bank in Oklahoma.

With the strong possibility of still more US bank failures, Congress and the FBI are finding out how Canada's banks have averted insolvency and the inefficiencies of entrepreneur-owners.

Certainly the banking system has worked well for Canadians, even though they grumble constantly about the banks' monolithic nature, conservative lending policies, and penchant for secrecy in internal operations.

The Canadian Banking Association estimates that by the end of 1981 Canada's 11 big chartered banks, with transcontinental networks of 7,000 branches, held a staggering $350 billion in assets.

Canadians are having twinges, however, about some risky-looking loans admitted to by Canada's normally secretive bank presidents.

These include about $8 billion lent to several giant Canadian corporations that were close to bankruptcy (which such loans may not forestall), and to once-solvent third-world countries such as Brazil, Mexico, and Argentina. Among them, these three nations now have $170 billion in external debts which they cannot now pay off.

Canada's senior bank managers, who often operate their institutions like private-sector, closely held corporations, assure the usually confident Canadians that these loans outstanding are small potatoes, in a manner of speaking, compared with the banks' immense assets.

Even though many of Canada's chartered banks are among the world's 10 largest , such as the Royal Bank of Canada or the Bank of Montreal, more and more Canadians are wondering if that secrecy is also resulting in some bad bank management.